Simon Rowan, Partner at Dunedin, talks to Rachel Bridge at Drax about his team's focus and strategy for investment
In these competitive times, it is increasingly important to have a focused strategy for selecting the right businesses in which to invest, says Simon Rowan, who heads up the business services team at UK private equity firm Dunedin.
He says: “There is a considerable amount of dry powder in the market and as a result, we see increased competition for deals. At Dunedin, we focus on sectors and niches where we have built up significant expertise and a demonstrable track record, which in turn gives us a competitive advantage when dealing with vendors of companies and management teams. For many businesses, it’s not just about price. Often they will choose a private equity firm with whom they have a good relationship or that has the strongest sector experience rather than the one who will pay the highest price.”
The key to success is to work out where an investment team’s real strengths and experience lie, Simon says. “You need to be very focused and think about where you could add value. If you are able to identify and deeply understand interesting, fast-growing sector niches, you are well placed to find the hidden champions - those businesses which have the potential to achieve market leadership, expand out of their home markets and excel on the world stage.”
One area where Dunedin has built up particular sector expertise is within niche consultancy businesses. Over the past few years, its investments in this area have included Blackrock Expert Services, a global independent expert witness business to the construction sector; Alpha FMC, a high-end consultancy to the asset management and fund management sector which Dunedin floated in 2017; and FRA, a business in its current portfolio which deals with blue chip regulatory disputes.
Dunedin’s team increasingly looks for businesses that have the potential to grow and develop through technology development, Simon says: “Technology is now a pre-requisite really to the types of opportunity that we are looking for. Having the potential for technological enablement is ultimately what is going to facilitate the business to grow.”
He points out that technology not only allows for scalability, it also provides defensibility for the business as building IP around the technology creates barriers to entry.
The Dunedin team aims to make three investments a year, typically investing in businesses with an enterprise value of £20 million to £100 million.
In this competitive market, it is also increasingly important to have a strategy for finding good potential investments in the first place, Simon says. As a result, his team is increasingly focused on direct origination, the art of finding promising businesses which are not even on the market.
He says: “We really focus on direct origination so that we are not always reliant on heavily auctioned processes which may just come down to who is willing to pay the most. The businesses we find this way are sometimes a bit smaller than those that are available through intermediated processes but focussing on direct origination allows us to get to know the business and the management team early and to understand if this is an asset we can add value to.”
Dunedin’s investment in Incremental Group, a digital transformation business, for example, came about through direct origination. Simon and his team had known the management team since 2015 and stayed close to them, while also building up expertise in the sector in which the business operates. As a result, Dunedin was able to move very quickly and do an off-market deal when the business became large enough for them to invest in.
It is a well-tested approach for Dunedin. Simon says: “We are talking to businesses now that aren’t going to be big enough for us for two to three years but this early engagement means we are able to build strong relationships for the future and develop our own understanding of the dynamics within their particular market segments.”
He says that while the competition in the market may make it harder to secure a deal, it is also a real sign of confidence in the PE industry: “The reason that prices are high is because people are seeing superior returns in this asset class. Private equity involvement brings real benefits to companies, particularly owner-managed businesses, because enabling owners to take some cash out often allows them to be much more ambitious, to take measured risks and to really accelerate the growth of their company."
"Private equity can also bring real operational expertise to help build businesses, whether that is building up the internal infrastructure, helping with internationalisation or driving a buy and build growth strategy. It is hugely beneficial for the wider economy.”
Drax lead: Graham Roadnight
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